Taking Advantage of Russia’s Resource Windfall

If the nation which has bestowed to the civilization such giants as Tchaikovsky and Shostakovich, Tolstoy and Bulgakov could manage its economy as splendidly and robustly as its culture, Russia would be doing just great! Unfortunately, it’s not the case. The resource curse is affecting the economy in a negative way and even more seriously than certain counterproductive habits and mental inertia from the old times of statist, centrally planned economy.

I’m afraid there is not much time left for Russia. If it wants to catch up with the advanced world – and become a true member of the G8 group of developed countries – it must use wisely for investment in restructuring and diversification of its economy the windfall revenue from exploitation of vast natural resources. Otherwise, the process of deindustrialization without offsetting by the nowadays service sector will continue and this great country – with huge potential for fast, durable, and sustainable development – will miss the chance to become one of the leaders of world economy. This decade will decide the fate of Russia for the whole 21st century. And the time runs fast.

The inflation remains too high, at over 9%, while the official rate of unemployment is above 7%. The true unemployment seems to be higher, somewhere between 10-12%, bringing so-called misery index, i.e., the sum of inflation and unemployment, to around 20%. Even with extraordinary energy means, the budget is in red and there is a deficit of 2.7% of GDP, yet this balance should be in surplus.

Two decades ago, at the dusk of the Soviet Union, Russia’s GDP was three times of China’s. Today it’s one third… In 2010-12, when China is able to grow by 10% per year, Russia’s GDP expands only by 4.0-4.5%. Hence, the Russian contribution to the world GDP is stagnant, since the world output does increase by similar rate. In China after three years the output is higher in real terms by 33, while in Russia only by 12.5%. Over a decade with such pace of growth it implies 260 and 48%, respectively… And that does make a difference. Very much because Russia has so much of natural resources, whilst China must import most of them what has forced her to restructure and diversify the economy. If China did have such enormous raw materials and energy means as Russia, I doubt it would be so successful. If Russia had much less of resource, it could be more prosperous.

Russia is accumulating the foreign reserves, already close to a half trillion dollars, what’s it the most inefficient way of managing financial resource. A bulk of them should be spent for investment in hard infrastructure, technological progress, and human capital. Of course, just investing is not enough to break the current drift. There is an urgent call for far going structural reforms and institutional building for the sake of uplifting the competitiveness of Russian firms and quality of management. There is a necessity to fight corruption and decentralize the administration. There is a must to further liberalize economic regulation, yet not to attempt the neoliberal utopia, as it was erroneously done in the 1990s.

This is the time to use profound surplus (the positive trade balance for last 12 months exceeds $155 billion) for investment in high-tech industry. It must be done through encouragement for joint ventures with foreign partners, private-public partnership and boost for small and medium businesses, so much lacking in the presence of long shadow of the late Soviet model of heavy industrialization.

What’s worse, the inequality in Russia is continuously increasing, not only beyond the point of social acceptance, but to the point when it turns against efficiency and growth. Hence, it must be an alert not only for social activists but for the business people as well. Income disparity is as large as it was during the czar times, before the Bolshevik revolution almost a century ago… This is the time to get rid of ill-advised flat income tax and introduce a healthy progressive tax, friendly for private entrepreneurship and at the same time contributing to the social cohesion. There is not a single nation in the West which came to the affluence with flat tax, and there won’t be a such in the East.

Additional fiscal revenue must be channeled to public services sector, especially education and healthcare, for the purpose to sustain the social capital. It’s not only value per se; it’s indispensable ingredient for private business to flourish. For the revenue from export of oil and gas one can buy many extravagances, but not necessary the qualified workforce, without which there won’t be any good future for the entrepreneurship and sensible economic expansion.

Only under such circumstances – supported by further going political democratization and enhancing the civic society – there will be a chance to counteract the growing wave of professionals’ emigration and to reverse the devastating trend of population decline. Otherwise, Russia may altogether lose momentum for the foreseeable future.